Five Things You Should Know Before Seeking External Investment

by Greg DePersio

2 min read

Accepting external financing is a big step for a small business. While it is exciting to receiving financial support, this help should also come at the right time to ensure your business plan will be followed. Before reaching out to external investors, determine whether you fulfill these five prerequisites.

Proof of a Successful Business Plan

External investors want to see historical evidence indicating your business will be successful. Without a historical trend to project into the future, an investor will have no basis to create expectations or substantiate an investment. Therefore, before seeking external investments, ensure your business plan has been acted upon and producing results. Have evidence proving customer growth, market share allocations,scalability potential, and client satisfaction. Show there is a need in the market for your business and that your plan has already begun fulfilling that need.

Know Your Golden Ticket

Some businesses simply need one big break to be wildly successful. Do you need just one key relationship with a major distributor? Does your company lack certain scientific or engineering knowledge? Do you need more cash flow, market exposure, or to reach into different markets? Your business may be successful now, but keying in on the item that will make your business explode will resonate more with investors, especially if the item is reasonable.

Knowing Your Downfalls

Alternatively, know when, how, and why your business might fail. This could be due to a lack of resources, unsatisfactory customer retention, or tough market competition. Regardless, the key is to know the challenges to target them early. These challenges should be included in your business plan. Being aware of your hurdles is the first step, as investors want to know how you plan on overcoming them. Show your awareness for forces outside of your company. Your small business is a small piece in an entire industry; educate prospective investors on where you are strong, where you are weak, and how you turn your weaknesses into strengths.

Have Numbers to Present

Investors want evidence, and a great way to demonstrate your company’s success is by having statistics to present. First, this starts with financial statements. Present financial information on a monthly or quarterly basis if your small business is young. Go beyond sales and net profit — highlight your liquidity, leverage, and efficiency through financial ratio analysis. Second, have performance metrics to gauge success. What is your customer’s satisfaction rate? What is your manufacturing spoilage or waste rate? Knowing these numbers will allow you to control them. For example, high waste rates can lead to you implementing efficiency processes or purchasing different materials.

Strive for Improvement

Receiving an investment from an external party is a step forward. The investor expects the funds to be used in a way that benefits the company, grows your business, and yields success for all parties. Therefore, understand it is your duty to continue improving. Accept mentoring or coaching to better understand ways to improve. Attend conferences, trainings, and seminars to gather information. Realize that you do not know everything, investors are fine with this if you’re willing to take steps to improve.

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